Publications

March, 2017 Newsletter
Provided by Leimberg Information Services

Ed Morrow on the Introduction of the "Death Tax Repeal Acts of 2017" - How the Proposed Bills Differ, in their Attack on INGs of All Things, and Threats to CRTs

“Practitioners should consider writing their Senator and representative, perhaps through trade groups, urging them to simply leave §2511(c) in the dustbin of history, or at the very least to protect transfers to charitable remainder trusts from its application. Why complicate the gift tax even further? Just axe it. While they’re at it, Congress should clarify in any repeal that Section 1014 applies as if there were still an estate tax, to protect those widows and widowers with QTIP trusts from a denial of step up in basis at the surviving spouse’s death. Those in community property states will want a similar clarification vis-a-vis the surviving spouse’s half of community property.

For those practitioners and taxpayers considering ING trusts, perhaps for a future sale of a substantial asset, it may be wise to start the drafting process earlier rather than later, enabling the trust to be quickly funded should it look likely for a new §2511(c) to be reenacted as part of any estate tax repeal. This would lock in the ability to later shift income, take advantage of better charitable strategies and avoid state income tax on subsequent sales of appreciated property, depending on the state in question.”

We close the week with Ed Morrow’s analysis of the “Death Tax Repeal Acts of 2017” and how they could potentially impact INGs and CRTs.

On January 24, 2017, five Republicans and one Democrat introduced H.R. 631, the “Death Tax Repeal Act of 2017,” and Senator Thune, with 31 Republican Senators co-sponsoring, introduced very similar legislation with the same title, S.B. 205, in the Senate. In the weeks prior, three much simpler estate tax repeal bills were introduced in the House, H.R. 30, H.R. 451 and H.R. 198, the latter also being referred to as the “Death Tax Repeal Act of 2017.

This by itself is not surprising news to any readers of this newsletter – or the news in general. Republican leadership and President Trump have long vowed to kill the “death tax,” and these bills are merely revivals of ones introduced in years past, albeit with greater likelihood of passage this time.

There are a few omissions of interest in the bills introduced so far in this session. There is no mention of any “mark to market” or modified carry-over basis regime in any of the bills, which was proposed by Donald Trump as part of his campaign. The only exception being that H.R. 431 is specifically described as “REPEAL OF ESTATE TAX AND RETENTION OF BASIS STEP-UP.”

Both S.B. 205 and H.R. 631 retain the gift tax at 35% while eliminating the estate and GST tax, and have some provisions to continue taxation of preexisting qualified domestic trusts (QDOTs) for ten years. H.R. 30 and H.R. 198 are much simpler – in a few bare sentences they would simply eliminate estate, GST and gift tax altogether, including on QDOTs. H.R. 431 would only eliminate the estate tax and touches neither GST nor gift tax.

Notably, none of these bills protect QTIP trusts from the loss of a step up in basis at the surviving spouse’s death. Many, but not all, of Section 1014’s triggers to adjust the basis at death require estate inclusion. Query whether the super-generous “double” step up in basis afforded to the surviving spouse’s portion of community property is also at risk, since it too requires estate inclusion.

How and when the sausage-making factory of Congress will ultimately reconcile all these to create something for the President to sign into law remains to be seen – much will be negotiated in the House Ways and Means and Senate Finance committees and there is yet the complicated drama of reconciliation and 60-vote hurdles in the Senate to play out.

This newsletter, however, will focus on a more obscure difference between H.R. 631 and S.B. 205 – the revival of Section 2511(c) of the tax code from the EGTTRA graveyard (S.B. 205 adds it, H.R. 631 omits it). This section was not originally designed to attack DING/NING trusts, but it would eliminate them nonetheless. The technique that it claimed to target has largely been eliminated by subsequent rulings.

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